Explanatory Memorandum to COM(2015)337 - Amendment of Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2015)337 - Amendment of Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments. |
|---|---|
| source | COM(2015)337  |
| date | 15-07-2015 |
1. CONTEXTOFTHEPROPOSAL
• Reasons for and objectives of the proposal
To effectively tackle climate change and achieve the EU's long-term decarbonisation objectives to cut emissions by at least 80% by 2050, continued progress is needed to a low-carbon economy with new opportunities for growth and jobs. As an important step in these efforts, the European Council agreed in October 2014 the 2030 policy framework for climate and energy.
The implementation of this 2030 energy and climate policy framework is a key element for building a resilient Energy Union with a forward-looking climate policy which is an overarching priority for the Commission over the coming years. At the same time, with the agreement on the 2030 policy framework and its implementation through this proposal, the EU has taken an important step towards a strong international climate agreement to be adopted in Paris in December 2015.
A centrepiece of the 2030 policy framework is the binding target to reduce overall EU greenhouse gas emissions by at least 40% domestically below 1990 levels by 2030. To achieve this target cost-effectively, the sectors covered by the EU emissions trading system (EU ETS) will have to reduce their emissions by 43% compared to 2005 while non-ETS sectors will have to reduce their emissions by 30% compared to 2005. The European Council outlined the main principles to achieve the reduction in the EU ETS1. This proposal creates the necessary legal framework implementing these principles set out by the European Council, addressing three main issues:
(1) The proposal translates the 43% greenhouse gas reduction target in 2030 in the ETS into a cap declining by 2.2% annually from 2021 onwards, corresponding to an additional reduction of around 556 million tonnes of carbon dioxide in the period 2021-2030 compared to the current annual decline of 1.74%.
(2) The proposal builds on the positive experience with the harmonised rules implemented since 2013, by further developing predictable, robust and fair rules for free allocation of allowances to industry to address the potential risk of carbon leakage in an adequate manner. The proposed rules aim at safeguarding the international competitiveness of the EU energy intensive industries in the gradual transition to a low-carbon economy as long as no comparable efforts are undertaken in other major economies, and maintain incentives for long-term investment in low-carbon technologies. Given that the European Council has decided that the share of allowances auctioned should not reduce, the number of allowances for free for industry is limited, necessitating well-targeted rules. This targeting is mainly achieved by three means: A more frequent alignment of the free allocation to production data will ensure that support is provided to growing companies and sectors. Updating the benchmarks used to calculate the free allocation will reflect industries' technological capacities and progress over the previous decade. The list of sectors receiving the highest share of free allocation will be more targeted to those most exposed to the potential risk of carbon leakage. While carbon leakage rules mainly address compensation for direct carbon costs, the proposal also addresses indirect carbon costs.
Bearing in mind the different energy mixes of Member States, proceeds from the EU ETS should be used for compensation of indirect carbon costs in line with State aid rules. Member
States should partially compensate certain installations in sectors or sub-sectors which have been determined to be exposed to a significant risk of carbon leakage because of costs related to greenhouse gas emissions passed on in electricity prices, where such support is necessary and proportionate and the incentive to save energy and to stimulate a shift in demand from 'grey' to 'green' electricity is maintained.
The Protocol and accompanying decisions adopted by the Conference of the Parties in Paris need to provide for the dynamic mobilisation of climate finance, technology transfer and capacity building for eligible Parties, particularly those with least capabilities. Public sector climate finance will continue to play an important in mobilising resources after 2020. Therefore, auction revenues should also be used for climate financing actions in vulnerable third countries, including adaptation to the impacts of climate. The amount of climate finance to be mobilised will also depend on the ambition and quality of the proposed Intended Nationally Determined Contributions (INDCs) of Parties, subsequent investment plans and national adaptation planning processes.
Proceeds from the EU ETS should also be used to promote skill formation and reallocation of labour affected by the transition of jobs in a decarbonising economy, in close coordination with the social partners.
The proposal contains several funding mechanisms to support economic actors in the power sector and industry in the innovation and investment challenges they face in the transition to a low-carbon economy. More specifically, the proposal supplements existing support for demonstration of innovative technologies and extends this to breakthrough innovation in industry. Free allocation of allowances continues to be available to modernise the power sector in lower-income Member States and a dedicated fund is established to facilitate investments in modernising the energy systems and improve energy efficiency so as to contribute to emission reductions. This additional funding builds on existing experience with the cooperation between the Commission and the European Investment Bank (EIB) in the context of the EU ETS and, where relevant, draws on features of the European Fund for Strategic Investments (EFSI).
This proposal also adapts the Directive and all powers previously delegated to the Commission for exercise through the Regulatory Procedure with scrutiny, to the system of delegated and implementing acts agreed pursuant to the Treaty of Lisbon2. In the light of the EU's commitment to Better Regulation, delegations and implementing acts are maintained only where they are essential for the effective operation of the EU ETS.
This proposal does not address issues relating to aviation's coverage in the EU ETS. Adjustments to the Directive's application to aviation activities should take effect after an international agreement has been reached at the ICAO Assembly in 2016 on a global-market based measure for implementation by 2020.
Consistency with existing policy provisions in the policy area
In terms of coherence with other policies in the area of climate action, renewables and energy efficiency policies are the most relevant. Both policies fully support the environmental effectiveness of the EU ETS and synergies between these policies and the EU ETS have been strengthened through the recently agreed Market Stability Reserve. In particular, as analysed in the impact assessment accompanying the 2030 climate and energy framework, cost-effectively achieving the overall emission reduction target of 40% compared to 1990 requires substantial contributions from renewable energy and energy efficiency measures.
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In terms of coherence with international climate policy, it is important to note that the EU ETS has effectively put a price on carbon and is widely used as a model for emissions trading systems around the world, benefitting from the EU's learning effects.
Consistency with other Union policies
The proposal provides for implementation of part of the 2030 climate and energy policy framework as a key element in the context of building a resilient Energy Union with a forward-looking climate policy.
Decarbonisation requires adjustments. EU policies and funds actively accompany those adjustments. In addition to the measures directly related to the EU ETS, EU instruments such as the European Fund for Strategic Investments or the Horizon 2020 programme as well as the European Structural and Investment Funds (EFSI) also offer potential funding for low-carbon innovation investments, leading to a perceived risk of funding duplication. The expansion of renewable energy and resource efficiency as well R&D are priority areas of the European Fund for Strategic Investment that will generate €315 billion of additional investment in the EU in the next three years. EFSI will work through financial instruments only, lending to existing projects ready to start within three years and will have a wider scope covering variety of sectors such as the digital economy and education. EU ETS funding is designed in accordance with State aid rules so as to ensure the effectiveness of public spending and to prevent market distortions. EU employment, social and skills policies accompany the transition of jobs in a decarbonising economy, including through the European Social Fund.
2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY
Legal basis
Articles 191 to 193 of the Treaty of the Functioning of the European Union (TFEU) confirm and specify EU competencies in the area of climate change. The legal basis for this proposal is Article 192 TFEU.
Subsidiarity (for non-exclusive competence)
The EU ETS Directive is an existing EU policy instrument that continues after 2020. In accordance with the principle of subsidiarity set out in Article 5 of the Treaty of the Functioning of the European Union, the objectives of the proposal amending this instrument can only be achieved through a proposal from the Commission at EU level.
Climate change is a trans-boundary problem, so coordination is necessary of climate action at European level and, where possible, at global level. More specifically, action at EU level will most effectively deliver the post-2020 carbon market reform, incentivising industry to invest in low-carbon technologies while preserving their international competitiveness and the EU's internal market.
The objectives of this Directive therefore cannot be sufficiently achieved by the Member States acting unilaterally, but can rather, by reasons of the scale and effects of the Directive, be better achieved at Union level.
Proportionality
As set out in the impact assessment, the proposal complies with the proportionality principle because it does not go beyond what is necessary in order to achieve the objectives of implementing the EU's greenhouse gas emission reduction target for 2030 in a cost-effective manner while at the same time ensuring the proper functioning of the internal market.
Choice of the instrument
The objectives of the present proposal can best be pursued through a Directive. This is the most appropriate legal instrument to make amendments to the existing EU ETS Directive (Directive 2003/87/EC).
A Directive requires Member States to achieve the objectives and implement the measures into their national substantive and procedural law systems. This approach gives the Member States more freedom when implementing an EU measure than does a Regulation, in that Member States are left the choice of the most appropriate means of implementing the measures in the Directive. This allows Member States to ensure that the amended rules are consistent with their existing substantive and procedural legal framework implementing the EU ETS, in particular regulating the permitting of installations as well as enforcement measures and penalties.
Finally, the choice of a Directive as the appropriate instrument is also in line with the principle that there should be as little intervention as possible, so long as the objectives are achieved.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER
Contents
- CONSULTATIONS
- Bearing in mind the different energy mixes of Member States, proceeds from the EU ETS should be used for compensation of indirect carbon costs in line with State aid rules. Member
- A summary of the findings and the individual submissions can be found on the DG Climate Action
- Auction share (Art. 10)
- Free allocation and carbon leakage provisions (Art. 10a and 10b)
- Indirect carbon costs (Art. 10a(6))
- Installations with low emissions (small emitters) (Art. 27 and 11(1))
- Innovation support (Art. 10a (8))
- Modernisation of the energy systems in lower income Member States (Art. 10c and 10d)
- Validity of allowances (Art. 13)
- Transition to the system of delegated and implementing acts ('Lisbonisation')
ANDIMPACTASSESSMENTS
Ex-post evaluations/fitness checks of existing legislation
The preliminary findings of a study evaluating the existing ETS Directive in terms of relevance, effectiveness, efficiency, EU-added value and coherence with other Union policies indicate that overall the EU ETS as a policy tool combining environmental regulation with a market instrument is working in practice and delivering on its targets. It is highly relevant for meeting the EU's climate targets, as it represents a cost-effective way for emission reductions. Emissions in the covered sectors have decreased steadily, and even though not all emission reductions can be attributed to the EU ETS alone, there is evidence that the system does contribute effectively to emission reductions.
The EU ETS facilitates the internalisation of CO2 costs. It plays a role when investment decisions are taken, even though with the current low carbon price, the CO2 costs are often included in the general envelope of energy costs. Smaller improvements in terms of GHG efficiency have become regular practice, but larger investments in GHG efficiency still remain the exception.
Moreover, the EU ETS has a clear EU value added since different systems or other climate policies at Member State level would lead to a fragmented and costly situation for the regulated entities, as well as different ambition levels and carbon prices throughout the EU, leading also to administrative complexity. The EU ETS with an EU-wide carbon price and its harmonised infrastructure takes advantages of the synergies that EU action can provide.
However, the implementation of the emission reduction target for 2030 and setting the cap at the emission level leading to a reduction of 43% compared to 2005 requires changes to the existing framework. This mainly includes the change of the annual linear reduction factor reducing the EU ETS cap from 2021 onwards, free allocation and carbon leakage, the share of allowances to be auctioned as well as low-carbon funding mechanisms.
Stakeholder consultations
At various steps in developing this proposal, Member States, industry representatives, NGOs, research and academic institutions, trade unions and citizens were involved. Complementing the public consultation for the 2030 framework, an extensive follow-up stakeholder
consultation was carried out on various technical aspects of the post-2020 carbon leakage provisions, as well as aspects related to innovation support. The Commission gained important insights from a written consultation open for comments from May to July 20143 and three stakeholder meetings convened in June, July and September 20144 focussing on carbon leakage. The findings of this consultation are publicly available on the following website:
ec.europa.eu/clima/policies/ets/cap/leakage
This was followed by an online consultation open for comments from December 2014 to March 2015 focussing mainly on other EU ETS aspects, such as the continuation of the free allocation for the power sector, lessons learnt from the NER300 applicable to the future Innovation Fund and its extension to industrial innovation projects, the governance structure of the Modernisation Fund, experience with the optional exclusion of small emitters from the ETS in phase 3, fees for the Union registry and the general evaluation of the EU ETS. The Commission received over 500 contributions from a wide spectrum of stakeholders. The results of this second consultation are reported in section 1.3.2. and Annex 3 of the Impact Assessment accompanying this proposal5 and have been taken into account for the current proposal to the extent possible.
In general, the public consultations showed broad support for the EU ETS as a policy instrument.
On free allocation and addressing the risk of carbon leakage, a number of industry stakeholders favour limited changes to the current system, while other stakeholders, including Member States and civil society, believe that more targeting or further harmonisation is needed. Taking into account these comments, the proposal provides for limited changes to the existing rules, but a more targeted approach to free allocation, updating benchmarks based on technological progress achieved over time while ensuring an adequate protection of industry's international competitiveness. At the same time, the proposal allows for a better alignment of the free allocation with current production levels by a more frequent calculation of individual allocations.
With regard to the Innovation Fund, energy and industry stakeholders generally welcome continued support for low-carbon innovation and the expansion of scope to include industry reflected in the proposal. Views differed on how the risk sharing approach could be tailored for industry or CCS to improve the effectiveness compared to the current NER 300 mechanism. The proposal addresses such concerns by allowing support at an earlier stage in the project life cycle and a higher rate of support.
On the Modernisation Fund, views on the appropriate governance structure also differed to a certain extent. Some stakeholders support a key role for the beneficiary Member States in managing the Fund, while others ask for a stronger role for all Member States, the Commission and the European Investment Bank. The proposal strikes a reasonable balance between the need to ensure efficient funding of projects in the beneficiary Member States on the one hand, and to ensure that the interests of all Member States and the expertise of the EIB on the other hand, are brought together to modernise the energy systems.
website ec.europa.eu/clima/consultations/articles/0023_en
Recordings of the meetings and the presentation can be found on the DG Climate Action website:
ec.europa.eu/clima/policies/ets/cap/leakage
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Regarding the optional free allocation to the energy sector, market participants generally support streamlined and simplified rules, as well as harmonised reporting guidelines to enhance the transparency of the mechanism. This need for increased transparency and clearer rules is duly reflected in the proposal, in particular, by enabling the Commission to publish information on investments received from the Member States.
• Collection and use of expertise
In terms of external expertise, the Commission bases itself on the growing body of peer-reviewed empirical research on the EU ETS. In addition it gathered expertise from a study on evaluation of the ETS, commissioned in 2014 and carried out by a consortium led by ICF International6. Furthermore, in 2014, a study7 was commissioned to assess the issue of costs being passed through from industrial sectors to their downstream customers and to determine the factors influencing such ability to pass through costs quantifying it for major energy intensive industry sectors. Another study8 was commissioned to evaluate the experience gathered with the harmonised benchmark-based allocation process, and in particular to evaluate whether the benchmarks have achieved the intended objectives. In 2013, a study9 was commissioned to assess the evidence for carbon leakage in the period 2005-2012 for ten major energy intensive industry sectors. The findings of these studies are discussed in the impact assessment accompanying the proposal.
Verified data received from the Member States to determine the free allocation in phase 3 were also used for the analysis carried out in the impact assessment.
• Impact assessment
The proposed Directive is accompanied by an impact assessment, which built largely on the findings of the comprehensive impact assessment on the 2030 framework10 , focusing on certain ETS-specific methodological elements not already assessed.
A summary sheet for the impact assessment, an executive summary, and the positive opinion of the Impact Assessment Board will be made publically available. The impact assessment was carried out for a number of aspects on which the European Council gave strategic guidance in its conclusions on the 2030 framework. This includes addressing the potential risk of carbon leakage, the establishment of a Modernisation and an Innovation Fund, optional free allocation to modernise the electricity sector in lower income Member States, as well as aspects building on the lessons learnt since 2013, such as the validity of emission allowances, guaranteeing a robust and secure registry and the continuation of the optional exclusion of small emitters.
For addressing the potential risk of carbon leakage, a range of options were considered concerning the update of benchmarks, production level adjustments, classification of sectors into carbon leakage groups and indirect cost compensation. For the Innovation Fund, options focussed on the way projects are screened and selected, and the way in which financial support is provided. For the Modernisation Fund, options were considered on its governance.
ICF International, Umweltbundesamt, SQ Consult, Ecologic Institut, Vivid Economics and ZEW – ongoing work
'Study on different pass-through factors to assess the impact of the EU ETS carbon cost' – on-going work
'Assessment of the first years of the functioning of the new allocation system based on benchmarks' – on-going work
Carbon Leakage and Competitiveness Assessment, Ecorys, 2014 (ec.europa.eu/clima/policies/ets/cap/leakage/docs )
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Regarding the optional free allocation to the energy sector, options are developed for improving its modalities and enhance transparency compared to the current practice.
In terms of impacts, the environmental ambition of the EU ETS is determined by the cap and the proposed change of the linear reduction factor ensures that the agreed headline target of a 43% reduction compared to 2005 for sectors under the EU ETS is achieved. The fact that the contribution the EU ETS has to make to the overall EU 2030 reduction target has already been set contributes to the fact that the overall impact was independent of the assessed policy choices.
Businesses covered by the EU ETS are directly affected. Sectoral impacts in major industrial sectors covered by the EU ETS vary to some degree depending on the options. However, policy choices that lower the costs and impacts on some industrial sectors typically result in higher costs and impacts for other industrial sectors because the total number of allowances that are available for free is limited. The proposal also provides opportunities for producers of renewable energy, and manufacturers of equipment for low-carbon technologies. In particular, additional funding for innovative technologies will generate new business opportunities.
• Regulatory fitness and simplification
In line with the Commission commitment to Better Regulation, the proposal has been prepared inclusively, based on full transparency and continuous engagement with stakeholders, listening to external feedback and taking into account external scrutiny to ensure the proposal strikes the right balance (see also section on the collection and use of expertise).
While the majority of installations under the EU ETS are in the energy-intensive industries with market structures characterised by large enterprises, the proposal also caters for small emitters, which may be owned by SMEs or micro enterprises: In addition to existing rules alleviating the administrative burden and costs of monitoring and reporting emissions, such installations with low emissions benefit from the proposed continuation of the possibility for Member States to exclude them from the EU ETS if they are subject to national measures leading to an equivalent contribution to emission reductions.
Fundamental
rights
The proposal respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union. In particular, it contributes to the objective of a high level of environmental protection in accordance with the principle of sustainable development as laid down in Article 37 of the Charter of Fundamental Rights of the European Union.11
4. BUDGETARYIMPLICATIONS
The EU ETS generates significant revenues for Member States' budgets. The proposal affects national budgets and administrations primarily because of this link. The secure operation of the Union registry is funded from the Union budget. There is also a small and limited impact on the EU budget which is, however, fully covered by the current MFF 2014-2020.
5. OTHERELEMENTS
Implementation plans and monitoring, evaluation and reporting arrangements
The delivery of the 2030 energy and climate framework will be included in the integrated governance and monitoring process under the Energy Union.
Article 10 i of the current Directive requires the Commission to monitor the functioning of the European carbon market and to submit each year a corresponding report to the European Parliament and the Council. In the context of the monitoring process, the Commission will also continue its dialogue with all relevant stakeholders.
Once the proposed Directive has been adopted, the Commission will continue to monitor the legal framework transposing obligations under the EU ETS in the Member States as well the implementation of specific obligations. To this end, Article 21 foresees that each year, the Member States submit to the Commission a report on the application of the Directive.
The proposal does not change any of the above reporting requirements. However, it foresees further specific reporting requirements for Member States, for example, for the free allocation of allowances to the power sector and the funding provided through the Modernisation Fund to modernise the energy systems in low-income Member States. These reporting requirements are designed to improve and guarantee the transparency of the implementation of the supported investments.
Finally, an ex-post evaluation will be made once the measures put forward by the proposal are being fully implemented in the Member States and have been operating for a significant period of time.
Explanatory documents
The proposed Directive sets out specific measures amending the existing modalities of the EU ETS. There are several legal obligations stemming from the proposed Directive. Its effective transposition will therefore require that specific and targeted amendments are made to the relevant national rules. However, in order for the Commission to monitor the correct implementation, it may in certain cases be insufficient for Member States to transmit the text of the amended national implementing provisions. Where appropriate, the proposal may therefore require Explanatory Documents on its transposition.
Detailed explanation of the specific provisions of the proposal
The main elements of the EU ETS Directive which are amended through the proposal are the following:
Linear reduction factor (Art.
9)
The linear reduction factor is changed to 2.2% from 2021 onwards. It ensures that the overall quantity of allowances ('cap') will decline at an increased annual pace resulting in an overall emission reduction of sectors under the EU ETS of 43% by 2030.
In line with the guidance from European Council of October 2014 that the share of allowances auctioned should not decline, the proposal sets out the relevant share as a percentage figure, taking into account the different elements determining this share in 2013 to 2020. In terms of distribution, 10% of the EU ETS allowances to be auctioned by the Member States will continue to be distributed to the benefit of certain lower-income Member States for the
purposes of solidarity, growth and interconnections, while the rest of the allowances will be shared out among all Member States.
The proposal provides that the benchmarks for the determination of the free allocation to industry will be updated to reflect the technological progress realised over time in the relevant sectors. To this end, a standard rate will be applied with the possibility of applying a modified rate in case that the actual rate of technological progress in a sector is shown to deviate substantially from this standard rate.
Sectors deemed to be exposed to a risk of carbon leakage will continue to receive a higher allocation than others who have a higher ability to pass on relevant costs in product prices. The revised methodology to identify the sectors and sub-sectors at a genuine risk of carbon leakage is based on two combined criteria: emissions intensity and trade intensity.
Furthermore, free allocation will be better aligned with actual production levels of sectors. To this end, free allocations will be periodically updated, while incentives to innovate are fully maintained and the administrative burden and costs for Member States, operators and the Commission remain reasonable.
Allocations for new entrants and significant increases in production will be provided from a dedicated reserve. This new entrants' reserve will be created with 250 million of unallocated allowances from the Market Stability Reserve and supplemented by allowances that remain unused due to the closure of installations or significant changes in production in the period from 2021 onwards. Allowances not allocated for free from the industry's share up to 2020 and not placed in the Market Stability Reserve will also be added to this new entrants' reserve.
With regard to indirect carbon costs that arise due to carbon costs being passed on in the price of electricity, the proposal foresees that Member States should provide compensation in line with the rules on State aid and that the revenues from auctioning should be used in this regard.
With regard to installations with low emissions, considering their relative higher administrative costs under the EU ETS, it is appropriate that the possibility to exclude such installations from the system is continued. The proposal thus foresees that installations excluded today may remain excluded provided they make an equivalent contribution to emission reductions. Member States may also exclude further installations as of 2021.
Existing EU-level support for innovation is supplemented through dedicating 400 million allowances for these purposes. An extra 50 million allowances is added to this amount from the allowances that remain unused in 2013 to 2020 and would otherwise be placed in the Market Stability Reserve in 2020. While such innovation support is currently limited to carbon capture and storage and renewable energy projects, the proposal broadens the support to industry with the aim to boost low-carbon innovation incentives.
To support the modernisation of energy systems in lower income Member States and fully exploit the power sectors potential to contribute to cost-effective emission reductions, the proposal foresees two measures: the continuation of the free allocation to the power sector and the creation of a Modernisation Fund.
As often pointed out by stakeholders, a major hurdle to assessing the effectiveness of the transitional free allocation to the power sector in certain Member States is a lack of transparency with regard to the applicable rules as well as the realisation of investments. The proposal enhances the transparency by requiring Member States to select investments above a certain monetary threshold on the basis of a competitive bidding process. It also sets clear publication requirements for the Member States and provides the Commission with the possibility to render important information on investments carried out public.
The Modernisation Fund is created with 2% of the overall quantity of allowances. These will be auctioned in accordance with the rules provided for in the EU ETS Auctioning Regulation to generate the necessary funds for projects to be carried out. The funds will be distributed between eligible Member States according to a predetermined key set out in the Annex of the proposal. Particular attention will be paid to the funding of small-scale projects.
In order to ease administrative costs, the proposal foresees that allowances issued for one trading period remain valid for later periods.
Important implementing legislation, including a regulation on auctioning, a regulation on the Union Registry as well as decisions on the rules for free allocation and carbon leakage has been adopted. To align the Directive with the provisions of the Treaty of Lisbon, the proposal empowers the Commission to adopt delegated and implementing acts in line with the relevant procedure where such powers were previously granted to the Commission.